After PayPal Split, EBay Owes All Of Its Growth To StubHub

EBay finally has broken out what it earns from StubHub, the popular ticket-selling marketplace it acquired for $310 million in 2007.

It turns out StubHub is eBay's fastest growing business, generating 34% quarterly year-over-year sales growth and annual revenues of $725 million, roughly 9% of total sales. StubHub's strong performance comes at a time when growth at eBay's iconic marketplace business is slowing to a crawl.

In the fourth quarter, StubHub generated over $1 billion in gross merchandising volumes, a 30% year-over-year rise. However, during the fourth quarter, eBay's total GMV were flat at $21.8 billion. Excluding currency swings, eBay's GMV increased 5.1% in the fourth quarter. For the full year, as-reported GMV at eBay fell 1% to $82 billion, but grew 5% on a FX neutral basis. Last year, when eBay didn't adjust for FX, GMV increased 9%.

EBay's disclosure of StubHub's revenues is the first in the company's history, and its comes six months after eBay spun off its highly profitable payments arms,
PayPal. However, eBay continues to be somewhat coy about StubHub's importance to its overall business. The San Jose-based company does not disclose the profit StubHub generates, or its margins.

It's likely that StubHub contributes even more to eBay's profits than it does to overall sales.

After all, StubHub posted a 55 basis point increase in its take rate to 19.6% in the fourth quarter, according to
Citigroup analyst Mark May. That compares to a 7.6% take rate for eBay's overall Marketplace business in the U.S., which dropped 44 basis points during the quarter.

If StubHub operated at a 34% operating margin, in-line with the rest of eBay's Marketplace business, StubHub would generate nearly a quarter billion dollars in operating profit, or roughly 11% of total operating profits.

EBay CEO Devin Wenig told analysts on Wednesday evening StubHub has volatile earnings due to the importance of big ticket events, and their location. Thus, the company won't break out StubHub profits on quarterly earnings reports.

There's some credence to Wenig's comments. Growth at StubHub tripled sequentially in the fourth quarter, indicating events like the New York Mets' march to the World Series bolstered quarterly revenues. For World Series games in Queens, tickets were often going for a minimum of $500, generating a 'take' of roughly $100 apiece for StubHub. Perhaps, a series between the Kansas City Royals and the Florida Marlins wouldn't have been such a blockbuster. Here's how Wenig put it:

StubHub also bounces around quarter-to-quarter based on the events. It’s much more choppy than eBay just because it sort of depends what the matchup is in the Super Bowl and what the events landscape is, and it was a very strong events landscape. So I would expect StubHub to keep growing. I’m not sure I’d expect it to keep growing at this rate, but it’s a good business and we really we’re proud of the fact that we’ve been able to grow StubHub using some of the eBay traffic flywheel over the last several years

For now, Wenig believes eBay can smartly allocate capital around its various businesses, and the company does the same for expenses. As such, eBay won't be breaking out StubHub margins in the future, Wenig told analysts.

With a balance sheet containing virtually no net debt and a Marketplace business that continues to generate EBITDA margins in excess of 40% and annual free cash flow well above $2 billion, Wenig is no rush to further monetize eBay's assets. However, if growth continues to flag in eBay's core business, investors may again prod the company to free profitable crown jewel assets, allowing them to stand on their own.

One problem eBay doesn't have right now is Carl Icahn.

The billionaire activist investor successfully campaigned for eBay to split its PayPal business, a move that already appears to be bearing fruit for investors. However, late last year, Icahn sold his eBay shares and doubled down on PayPal, the asset he said was being undervalued within eBay's conglomerate structure.

The disclosure of StubHub's revenue also comes at a time when many savvy acquirers in the tech sector are contemplating reporting the earnings they generate from home-run deals.

Google (Alphabet) recently indicated it would start disclosing the earnings of YouTube, which it acquired for $3 billion in 2006. And after acquiring Instagram for $1 billion ahead of its 2012 initial public offering,
Facebook may eventually decide to make a similar move, though it pushed back against those suggestions on a Thursday conference call.